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Eleventh Circuit: Mortgages not covered by bankruptcy discharge

In In re Dukes, No. 16-16513 (11th Cir. Dec. 6, 2018), the Eleventh Circuit held that a debtor’s mortgage obligation was not discharged, despite a proof of claim not being filed, because the mortgage was not provided for by the debtor’s plan and because of the anti-modification provision of Section 1322(b)(2).

The debtor took out a first and second mortgage on her home in 1989 and 2007, respectively, totaling roughly $150,000. She filed a petition for Chapter 13 bankruptcy relief in February 2009. The mortgage lender only filed a proof of claim for the second mortgage. Debtor and the mortgage lender agreed that she would make her mortgage payments outside the plan. Although she was current on her mortgage payments at the time of filing, debtor stopped paying her mortgages in 2011, and the lender foreclosed on her home in 2013.

In 2014, the mortgage lender reopened debtor’s case to file an adversary proceeding to declare that the mortgages were not discharged. The bankruptcy court agreed and held that the mortgages were not discharged because the mortgages were not provided for by the plan as they were paid outside the plan and unaffected by the plan itself. The bankruptcy court also held that even if the mortgages were provided for in the plan, the anti-modification provision of Section 1322(b)(2) prohibited modifying the mortgage to a deficiency judgment and the claim was one for long-term debt under Section 1322(b)(5). The District Court affirmed.

The Eleventh Circuit affirmed both holdings of the bankruptcy court. The Eleventh Circuit held that for a claim to be provided for by the plan, the plan must make a provision for it or stipulate to something about it in the plan, which was not done by the debtor’s plan related to the mortgages. Where a claim is wholly governed by the original loan documents, rather than the terms of the bankruptcy plan, it is not provided for by the plan as contemplated by the Bankruptcy Code. The Eleventh Circuit also held that a discharge would violate the anti-modification provision of Section 1322(b)(2). A lack of objection to the plan was not consent by the mortgage lender to a discharge of its debts, and the loss of the right to seek a deficiency from the debtor personally would modify the mortgage lender’s rights. Finally, the Eleventh Circuit held that the failure to file a proof of claim did not result in a discharge of the debt because the debtor had waived this argument by not asserting it before the bankruptcy court and because of the anti-modification provision of Section 1322(b)(2).